﻿This thesis is focused on two issues: capital flows to China and capital mobility
across provinces and regions in China.
First, this thesis attempts to model the time series characteristics of capital flows
to China over the period 1999-2008, namely, bond flows (BF), equity flows (EF), bank
credit (BC), and foreign direct investment (FDI). By utilizing the state space model
and using the Kalman filtering algorithm with maximum likelihood estimation, we
try to gauge the relative importance of the permanent and temporary components
of each series. By incorporating intervention and explanatory variables, we also try
to detect if the capital control measure imposed by the Chinese government and the
market sentiment of RMB foreign exchange rate appreciation expectation have any
effect upon those flows. The empirical result shows that all four flows are dominated
by a transitory component, among which BC flows have a relatively large permanent
component and are the only series sensitive to market sentiment measure. In addition,
capital control measures successfully skew flows to come in through FDI and bond
flow channels instead of equity flows. Our extended model with intervention and
explanatory variables for those flows also have better prediction performance compared
to Sarno and Taylor (1999a) and the benchmark models.
Secondly, we examine provincial and regional capital mobility in China, and track
how the degree of mobility has changed over time under the framework of Feldstein
and Horioka (1980) from 1978 to 2006, during periods of economic reform. The effects of fiscal and redistributive activities of different levels of government in China
on private capital mobility are taken into account. By estimating the cointegrating
vector of saving and investment through bootstrap panel cointegration technique from
Chang (2004) and Chang et al. (2006) which properly handle cross-sectional dependency, we show that there is a significant improvement in capital mobility over time
in China, particularly for private capital in the more developed regions. The central and provincial governments, via their taxation, spending, and transfers, loosen the
relationship between private saving and investment, and appear to promote capital
mobility, particularly for less developed regions.
Third, we use an alternative framework from Campbell and Mankiw (1990a,b)
to assess the evolution of regional capital mobility in China between 1978 and 2008.
Panel time-varying coe±cient methods show that changes in capital mobility across
China, driven by market-oriented economic reform, have had only a slight impact on
the relation between consumption and net output across regions. Random coe±cient
model with parameter endogeneity shows that when assuming heterogeneity across
regions, we only observe a slight increase in capital mobility across time, which is
comparable to some of the results in the framework of Feldstein and Horioka (1980).